Palm Inc Analysis Essays

1589 WordsApr 27, 20157 Pages
Palm, Inc. Minicase Introduction Palm Inc. is a division of 3Com. Because of stock price volatility, the CFO is looking into better understanding how Palm is valued in the market. Managers/CFOs often use heuristics for valuation purposes as opposed to traditional methods such as the DCF. Metrics such as the ones used by Palm's CFO, the P/E and price-to-sales, are often easier to use and require less research and fewer variables. However, relying on such metrics can lead to the affect heuristic. DCF is the methodology that should be used to ensure the fundamental value is accurate. The application of heuristics in valuation is often subject to bias. The bias can stem from incorrect assumptions made in regards to inputs for…show more content…
Managers rely on unpolished heuristics to measure fundamental value, because they are considered simpler and more intuitive than the DCF approach. Some of the biases that can cause valuations to be affected are misframing, growth opportunities, the 1/n Heuristic and excessive optimism. These biases stem from poor assumptions, leading to biased inputs. Furthermore, it is believed financial executives and analysts who make biased forecast of future earnings and P/E ratios will typically end up with biased valuations. Managers rely on unpolished heuristics to measure fundamental value, because they are considered simpler and more intuitive than the DCF approach. Heuristics and Biases Applied to Palm, Inc. Palm Inc. relied on valuation heuristics rather than discounted cash flow methods. Its valuation was based on two heuristics methods The P/E, and the PEG ratios. Since information on the sales of Palm are not provided no conclusions can be drawn from a price-to-sales heuristic, although it was a consideration for the CFO. DCF Analysis There are several things that can be determined from the information obtained through our review. The first is in relation to the P/E ratio. The market price is $21.69, with an EPS of $.0.51. This leads to a P/E Ratio of 42.51. This is significantly higher than the P/E ratio of 5.76 based off the fundamental value. Since the share price of $2.94 is significantly lower, the P/E ratio is also

More about Palm Inc Analysis Essays

Open Document